Why the Rout in Financials Isn't Over

By

Robin Goldwyn Blumenthal

June 30, 2008 11:59 p.m. ET

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HOW LOW CAN THEY GO? Ever since the credit crisis began last summer, financial-services stocks have been spiraling down. Just last week,
Citigroup
plunged to a 10-year low as Goldman Sachs downgraded the stock to Sell.

Two Tops Too Many: The industry's stocks have formed a "double top" in the past 10 years -- often an ominous sign. Plus, the highs of last year were higher than those before the woes of 1998. Warns Louise Yamada: "The bigger the top, the bigger the drop."

Bottom fishers might want to reel in their lines: Louise Yamada, a top market technician, warns that the sector's rout is "far from over." Based on her reading of stock charts, some big names could fall another 40% or 50%. Citigroup (ticker: C), now about 18, could drop to 10 before the carnage is over, Yamada says.

She adds there's a "good shot" financial stocks will fall from 16% of the Standard & Poor's 500 index today to the single digits, a level not seen since 1980. As recently as last year, financials made up 22% of the index.

Though bulls have argued that the woes of the financials may prove relatively short-lived, as in 1998, Yamada says those comparisons are specious. "There's nothing to suggest financials have had this kind of structural decline probably since the 1920s or '30s," she tells Barron's.

Yamada's sharp calls have earned her a strong following over the past three decades. She headed up technical analysis at Smith Barney for 25 years before starting her own firm, Louise Yamada Technical Research Advisors, in 2005.

Citigroup: A Sorry Supermarket -- The banking giant has had a double top of its own, and many of its price supports have broken down. Yamada says the stock, hit hard last week, could fall to as little as $10 from about $18 now.

The financial sector's chart patterns, she warned in a recent report to clients, "carry much greater negative implications" than they did in the financial crisis of 1998, which was triggered by the collapse of the Russian ruble. In '98, both the prices of financial stocks and their strength relative to the market peaked at much lower levels than last year. And, as Yamada reminds her readers, "the bigger the top, the bigger the drop; and the bigger the drop, the longer the need for repair." That's why she thinks it will be years before these stocks recover and sustain their gains. (Barron's cover story "A New Road Map for the Street," hints at how Wall Street firms ultimately may reinvent themselves.)

Fifth Third: No Longer First -- Time was when this regional bank was revered for its efficient operations. But its shares have fallen far and broken through a critical support level, 30. They could drop another 50%, Yamada says.

Yamada has been predicting trouble since late 2005, and by March of last year had rated most of the sector's sub-industries, such as brokerage firms and mortgage companies, Avoid or Sell. Now, she says, financials are "just starting to go to new lows," and the relative strength across all groups in the sector "looks awful."

Citigroup became a candidate for trouble when its stock produced a "double top" in the eight years since 2000. That's often an ominous sign. Then, last year, the stock's relative-strength indicator broke a 17-year uptrend, and multiple price supports gave way, Yamada says. She suggests the shares could easily fall to 15 and possibly to 10.

Merrill Lynch: Where's the Bull? -- The brokerage behemoth's shares reached a top of about 100 but are now flirting with a resistance point of 38. Yamada's prediction: They may rally a bit but are at risk of heading to 20.

Citi is hardly the only bank with a troubling stock chart. Cincinnati-based bank
Fifth Third Bancorp
(FITB), which recently said it will slash its dividend by 66% and sell $1 billion in convertible preferred stock to shore up its balance sheet, has declined to 10 from 69. Having broken through a 10-year support of 30, the stock may be experiencing a final "capitulation" phase and could fall another 50%, Yamada says.

Then there's
Merrill Lynch
(MER), recently about 33. Though Yamada says the stock conceivably could rally to 44 or 45, she'd use any strength as an opportunity to lighten up -- because the risk is toward 30 or even 20.

In short, it's no time to be banking on the banks. As Don Coxe, global portfolio strategist at Canada's BMO Capital Markets, put it recently: "It looks as if all big banks on Wall Street are going to be places where not only would you not want to own their stocks but not even have deposits with them." Lock up the vaults, folks.

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